Issue :   
Happy Dussehra and Diwali to all Readers.          November 2019 Edition of Power Politics is updated.
Issue:June' 2019


The depositors left in the lurch !

Malladi Rama Rao

After protests from account holders, the RBI raised the amount to Rs 10,000
and then to Rs 40,000.

The Rs 6,500 crore fraud engulfing the Punjab and Maharashtra Bank (PMC), founded in a small room in Mumbai in 1984, shows that neither the RBI nor the government agencies have learnt any lesson even two decades after the failure of Madhavpura Mercantile Cooperative Bank in 2001.

PMC Bank crisis India’s urban cooperative banking system is two centuries-old. Its problems remain the same – Politicianbanker nexus, poor corporate governance and slackness on the part of watchdogs, besides exposure to a single lender most often in the real estate sector, stock market or gold business – all the three deemed sensitive by the RBI.
The Rs 6,500 crore fraud engulfing the Punjab and Maharashtra Bank (PMC), founded in a small room in Mumbai in 1984, shows that neither the RBI nor the government agencies have learnt any lesson even two decades after the failure of Madhavpura Mercantile Cooperative Bank in 2001. If a stock broker had besmirched Madhavpura, real estate firm,Housing Development and Infrastructure Limited, (HDIL), which has since become bankrupt, has pulled down the PMC by accounting for about two-thirds of its loans since 2008.

How RBI allowed the PMC to get away with its shenanigans for so long remains a Sudoku. It claimed that cooperative banks have been done in by poor management, which is not under RBI supervision are neither here nor there. The BJP-led Maharashtra government also cannot escape the blame since PMC functioned under its very nose in Mumbai.One of the directors on PMC Board is the son of a local BJP legislator.

Depositors protesting outside the RBI's office in Mumbai

Towards end - September, the RBI woke up to the gravity of the crisis in PMC which has left in the lurch over 51,000 depositors. And appointed an administrator. Initially it had limited withdrawal from each account to just Rs 1,000. But after widespread protests’, raised the amount substantially. Between January and September,three cooperative banks came under similar or harsher restrictions; these are Kolikata Mahila Cooperative Bank and United Cooperative Bank from West Bengal, Hindu Cooperative Bank from Punjab taking the number of Urban Cooperative Banks under RBI watch to ten. But PMC attracted media attention because it is a large cooperative bank that had reported for 2018-19 a deposit base of over Rs 11,000 crore and net profit nearly Rs 100 crore even as sticky loans (nonperforming assets, NPAs) more than doubled between FY19 and FY 18up - from 1.05% to 2.19% at the end of March this year.

HDIL MD Sarang and Rakesh Wadhawan being produced in the
Killa Court in Punjab and Maharashtra Co-operative bank scam
The statutory auditor did not flag a single concern in the audit report for 2018-19. Put simply, it meant that the auditor had no inkling of what has since come to light. To hide the NPAs resulting from the dealings withHDIL, the PMC management created several hundred fictitious accounts. HDIL accounted for bulk of the bank’s total loan book. Out of the Rs 4,355.46 crore of loans under the scanner, around Rs 2,145.78 crore were transferred to accounts held by the HDIL owners, Rakesh Wadhwan, and Sarang Wadhwan (both have since been arrested by Mumbai Police).

According to investigators, PMC Managing Director, Joy Thomas, who is presently in police custody, camouflaged HDIL’s 44 bad loans in nearly 21,000 fictitious accounts. Most of these accounts were dormant but were secured with passwords to protect them from being detected during RBI inspection.

PMC chairman, Waryam Singh, played no less significant role in the whole deal. He was an associate of Wadhwans and was on the board of HDIL between 2006 and 2015 with close to two per cent stake in the company. Before joining the PMC he sold his entire stake in the real estate company.

Waryam Singh “The conduct of the bankers is intentional and has led to omission and non-compliance which points out their direct role in helping the borrower. PMC employees tampered with the software and that is why the 44 accounts mentioned in the FIR did not reflect in the system”, a senior police officer privy to the investigation was quoted as saying.
Internal inquiry into the bank's financial transactions ordered by RBIappointed administrator has put spotlight on another aspect of the PMC scam. It is Rs 10.5 crore cash missing from PMC records.Multiple cheques issued by HDIL and its related entities over the past two years were never deposited by Joy Thomas; yet he provided them with cash. While the cheques amount to over Rs 10 crore, there is no accounting for another Rs 50-55 lakh. The cheques' entry is not reflected in the bank's book. Thomas is suspected to have pocketed Rs 50 lakh to Rs 55 lakh. He along with the loan committee members, had sanctioned loans to HDIL and its directors.

PMC's exposure to HDIL group is nearly 73 per cent of its total loan book size of Rs 8,880 crore (as of September 19, 2019).Under RBI regulation, a single entity exposure limit for banks is 15 per cent of their capital fund while it is 20 per cent for group companies.

Former MD of PMC Bank
Joy Thomas
In HDIL's case, the exposure was four times the normal limit, Joy Thomas confessed in a letter to the RBI after the scam broke out. At one stage, before it became bankrupt, HDIL had several projects at Kurla, Nahur, Mulund and Palghar and has a residential portfolio of 86.22 lakh sq ft under construction – all in Mumbai. It is said to have had a land reserve of around 193 million sq.ft with 90 per cent of its land reserves in Mumbai Metropolitan Region.
PMC lending to HDIL is in violation of banking norms, and the way it went about hiding the deals is something really novel. So is the reasoning offered by Thomas. “As the outstandings (loans) were huge and if these were classified as NPA, it would have affected the bank's profitability and the bank would have faced regulatory action from RBI,” he stated in his confessional. “The concealment of information from the board, auditors and regulators was due to fear of reputational loss,” he added.

Who the whistleblower on PMC is unclear. Some reports say that a PMC board member revealed the actual balance sheet to the RBI and thus compelled managing director Thomas to make an open confession of the fraud he and his cohorts have perpetrated for over a decade.

All this amounts to breaking the RBI rules for six-seven years. Just days before the RBI stepped in, in the month of September, also PMC advanced Rs 96 crore to the promoters of HDIL ignoring the fact that the real estate firm has gone bust and was facing action under Insolvency and Bankruptcy Code.

Who the whistle-blower on PMC is unclear. Some reports say that a PMC board member revealed the actual balance sheet to the RBI and thus compelled managing director Thomas to make an open confession of the fraud he and his cohorts have perpetrated for over a decade.


Expectedly, the Reserve Bank of India, wants to reassure the public.“There are rumours in some locations about certain banks, including cooperative banks, resulting in anxiety among the depositors. RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours," the Reserve Bank said in a tweet on Oct 1.

The market did not take the advisory seriously and the Nifty Bank index tanked by 1.30 per cent in intraday trade that very day. Well, concerns regarding stress in the financial system are such.

PMC depositors are in a state of panic; their trust in the banking systems shattered. At least three depositors have died of shock and dismay unable to grapple with the reality that insurance cover for their money is limited to just one lakh rupees. Thousands of them are regularly staging protests at the PMC headquarter at Bhandup, in northeast Mumbai and its 137 branches in Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh besides Maharashtra.

Devendra Fadnavis The Maharashtra government has washed off its hands. “Unfortunately, a revival package for PMC bank is not in jurisdiction of the state government”, Chief Minister Devendra Fadnavis told an election rallies in Mumbai and Pune as the PMC scam became a poll issue. He floated the idea of merger of PMC with some other entity but said he would “pursue the matter after the assembly polls”.


Nirmala Sitharaman Union Finance Minister Nirmala Sitharaman has not held out any such promise though.
“Spoke to RBI governor, concerns of PMC Bank's customers will be addressed”, she said on Oct 12, while in Pune for electioneering. She added: “We understand the justified worries of the customers.”
Probably, as an afterthought she remarked: “Secretaries from the department of financial services and economic affairs will be meeting a deputy governor of RBI soon to look into the ‘shortcomings’ of the functioning of multi-state cooperative banks and see if any amendments can be made to the laws”.
No surprise, the heading for an edit on PMC implosion in a leading English daily, read: “Something rotten in India’s financial system”.

‘Under watch’ banks

There are in all 54 urban cooperative banks nationwide. Of them, 11 are under RBI scanner long before PMC has hit the headlines. Significantly, most of these ‘under watch’ banks whose lending is freezed and deposit withdrawal capped are in Maharashtra.

Why people prefer coop banks?

The USP of Coop-Banks is higher interest rate. They also provide financing with less hassles to agriculturists, rural industries and to trade and industry of urban areas. However,deposits up to Rs 1 lakh are insured like in any nationalized banks.Together, UCBs account for four per cent of deposits and three per cent of outstanding loans in the banking system..

Who controls coop banks?

The answer is simple: the promoters control and they are generally close to local politicians. This is an inherent weakness, for which no remedy is in sight. The RBI only supervises their banking ops, and has no full control which rests with the state government concerned.

PMC triggers crisis

PMC troubles are set to trigger a new round of crisis in the banking sector, firstly because it is amongst the top five in the segment with the status of scheduled bank, and, secondly, because several cooperatives have parked their funds with it.

As many as 1, 754 cooperative credit societies, 15000 cooperative housing societies and several cooperative entities have made deposits with PMC, which, according to a media report, was to play the white knight to the City Cooperative Bank and Mapusa Urban Cooperative Bank as well.